In Part 3 of our series on external trends impacting small and mid-sized companies in 2019, we study political trends affecting business. Note: Every effort has been made to present a balanced, unbiased reporting of these trends.

China and international trade

As of this writing, U.S.-China relations have soured further after the arrest of Huawei’s Meng Wanzhou in Canada. This appears to represent a warning shot and marks the Trump administration’s resolve to mitigate the trade imbalance, alleged currency manipulation, cyber threats and loss of American intellectual property.

Yet, strained U.S.-China relations seem to cut deeper as the two superpowers are embroiled in an arms race from space to 5G and chip production. The world is watching to see if tariffs represent the long-term trade policy of the United States.

U.S. companies are actively working to restructure their global supply chains, including evaluating options in Mexico, Singapore, Malaysia, Vietnam and Thailand. [i] Major retailers, such as Walmart and Best Buy, have indicated to their suppliers that they expect them to mitigate supply risk and are willing to pay more to do so.

Ironically, China is forging a relationship with Russia in opposition to the U.S. When the U.S. first entered into a relationship with China in the 1970s, it was to stem the tide of Russia. In a role reversal, Russia and China are cooperating on a range of policy issues, including energy and security. [ii]

Meanwhile the newly-formed U.S.-Mexico-Canada agreement represents only cosmetic changes to NAFTA. Immigration aside, Mexico’s prominence as a trade partner, proximity and lower labor rates are attractive to U.S. companies. It should be noted that the agreement is yet to be ratified by Congress. Meanwhile, Mexico’s newly elected President is also sabre-rattling with anti-U.S. rhetoric.

Europe

A decade of crisis leaves Europe in political disarray. Debt, refugees and Brexit have taken a toll. Britain leaves the European Union in March, changing the political underpinnings in Europe. Brexit is not only costing British Prime Minister Theresa May control but is likely to plunge Europe further into economic turmoil.

Nationalist political parties are winning favor in Europe, including in Italy and Austria. EU elections take place in May. German Chancellor Angela Merkel’s decision not to seek re-election marks a turning point in 2021, as Europe loses its most influential leader at a critical time. [iii] Merkel’s contemporary, Annegret Kramp-Karrenbauer, is slated to succeed her.

Impact of midterm elections & future legislation

The U.S. midterm election only served to widen the political divide as Democrats won the house and Republicans expanded their hold in the Senate. [iv] The “blue wave” was buoyed by the Democratic base, including white female voters under 30 years old. [v]

Democrats fared well in gubernatorial races, including wins in Wisconsin, Pennsylvania and Michigan — states that would be impacted by a protracted trade war. [vi] Other states relying on exports include Texas, Kentucky and Tennessee. [vii]

In several states, such as Maine and Kansas, incoming Democratic governors have promised to expand Medicare, and measures in Nebraska, Idaho and Utah also provide new benefits to poor families. [viii] Republicans still hold a commanding lead in state legislatures. Democrats lost 968 seats in local state elections during the Obama administration but are now making up ground. [ix]

Democrats do not have enough votes to block President Donald Trump’s judicial appointments. He has already appointed more appellate judges in his first two years than any other president. He is likely to turn his attention to foreign policy, where Dems have less ability to impede his agenda.

But President Trump lacks enough political capital to set his domestic agenda without the support of Congressional moderates. Democrats have unfettered subpoena power and are likely to use it to investigate the President and his allies. [x] As of this writing, the Mueller findings are unknown.

There are now 118 female members of congress (a record). Historically, women in congress have sponsored more bills on education, healthcare, violence against women, and abortion than their male counterparts. Surveys of members of Congress have rated women as better collaborators, suggesting some consensus-building could occur. [xi]

Given swelling deficits and the tenuous balance in Congress, a middle-class tax cut is unlikely. Several states including Colorado, South Dakota, Missouri, Utah and Washington passed measures that reduced taxes or made tax increases more difficult in the future. [xii]

Dems’ oversight of key committees, such as Oversight and Government Reform, Judiciary and Intelligence, is expected to take on a more prominent role as Democrats are likely to try to discredit the President, reviewing his tax returns and the like. [xiii]

House Financial Services Committee Chair Maxine Waters (D) has voiced her opposition to dismantling financial regulations. She will have the ability to investigate banks and has announced her intent to redirect the Consumer Financial Protection Bureau. Iowa Senator Chuck Grassley (R) is the likely Finance Committee Chair, and if Dems want to modify the Affordable Care Act, they will have to win him over.

Major legislative initiatives in 2019 and beyond include an overhaul of the criminal justice system and an infrastructure bill that will provide both parties cover with the prospect of new jobs. [xiv] Healthcare, guns and climate change are lightning rod issues for Dems, and they are likely to try to revitalize the Affordable Care Act.

But the first priority for Congress in the new term will be to raise the debt ceiling by March 2, likely to spark a larger compromise on the sequester and appropriations. [xv] Each game of chicken on funding brings the threat of a government shutdown.

Immigration and employment

Expect Trump to use executive order for action on immigration. The government is approving fewer L1 and H1B visas. [xvi] It is expected that the government will revise the H1B program in favor of highly skilled workers. [xvii]

Employers on the West Coast and Midwest are starving for workers, and the U.S. immigration policy is only exacerbating the hiring crisis.

U.S. military

The U.S. military is conducting an exhaustive review of its supply chain out of concern that its suppliers would not be able to ramp up during a conflict. [xviii] The Pentagon notes the struggle of airlines to increase capacity. Going into 2019, U.S. aerospace and defense contracts have big increases in backlogs. U.S. military also faces significant cyberthreats and is having difficulty hiring qualified cyber experts. [xix] They are leaning on the private sector and ramping up standards and audits.

Global trends

U.S. sanction on Iran may lack teeth without the support of America’s allies, many of whom are committed to the Iran nuclear deal. [xx] France has publicly called on European countries to defy the sanctions.

French President Emmanuel Macron’s call for a “European Army” is not taken seriously by most observers, who view it as a ploy meant to threaten Trump and the American socio-economic-military complex. Britain’s exit from the EU will reduce Europe’s military capabilities. Of NATO allies, over two thirds have committed to spend 2% of their GDP on defense. [xxi]

Trump is catching heat for inaction on Saudi Arabia. Should Trump break ranks, energy prices could be adversely affected.

Africa is a hotbed of economic activity, and China, Russia and others will try to influence its development. Internet connectivity is a boon to investment in education and local economies. [xxii] Corruption is still rampant in some countries with unstable political systems.

The winner in strained U.S.-China relations will be other Asian countries with low cost labor. There will be significant change in Asia in 2019, where there will be elections in India, Indonesia and the Philippines. [xxiii]

While economic strife continues in some Central and South American countries, Brazil is another potential benefactor. Brazil has already seen an uptick in demand of soybeans after China imposed a tariff. [xxiv] Economic strength could stabilize the politics within the region.

References

[i] U.S. Won’t Resume Trade Talks Without Firm Proposal from a Wary China by Davis and Wei, The Wall Street Journal
[ii] The Kiplinger Letter, September 7
[iii] The Year Ahead 2019, Bloomberg Businessweek
[iv] Where the Wave Breaks: The mid-term Senate races, The Economist
[v] Our mid-terms forecast for the House of Representatives, The Economist
[vi] The Democrats’ New Power Tools by Joshua Green, Bloomberg Businessweek
[vii] The Kiplinger Letter July 6
[viii] The Kiplinger Letter November 9
[ix] The Kiplinger Letter November 16
[x] The Democrats’ New Power Tools by Joshua Green, Bloomberg Businessweek
[xi] U.S. Elects Record Number of Women to House of Representatives, Bloomberg Businessweek
[xii] Politics, Bloomberg Businessweek
[xiii] Long Division, The Economist
[xiv] Long Division, The Economist
[xv] Policy Risk Factors for Small and Midsized Businesses in 2019 webinar, Vistage
[xvi] The Kiplinger Letter July 20
[xvii] The Kiplinger Letter November 21
[xviii] Pentagon to Audit Defense Supply Chains by Doug Cameron, The Wall Street Journal
[xix] The Kiplinger Letter November 21
[xx] The Kiplinger Letter November 9
[xxi] The Kiplinger Letter July 20
[xxii] Pew Research
[xxiii] Fitch Solutions
[xxiv] 4 Global Trends You Can Bet On in 2019 by Rob Curran, Time

Marc Emmer is President of Optimize Inc., a growth consultancy specializing in strategic planning. The release of Marc's second book, "Momentum, How Companies Decide What to Do Next” was covered online by Yahoo Finance, Business insider, CBS and NBC. Marc has crafted strategic plans for over 140 organizations, including more than 50 Vistage members. Marc is also a frequent contributor to the Vistage Research Center and Forbes. Reach him at marc@optimizeinc.net.

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